On August 17, 2006, ADP announced its intention to acquire Employease, Inc., in a move that will certainly become a watershed event for both the Software-as-a-Service (SaaS) and business services industries.

Although the financial terms of the deal have not been revealed, the market implications of this transaction are significant.

Unlike previous SaaS acquisitions which have been discussed in this blog, the Employease acquisition is the first that doesn’t involve another technology company. Instead, it is the first major acquisition of a SaaS vendor by a business services company.

The acquisition further legitimizing the functional capabilities and scaleability of SaaS.

The transaction demonstrates that business service companies are beginning to recognize that they can more quickly and cost-effectively enhance and expand their solution portfolios by buying SaaS vendors rather than building their own on-demand applications and service delivery infrastructures.

One of the primary attributes which has set many of today’s SaaS providers apart from the application service providers (ASPs) of the past is their focus on business benefits as opposed to technical features. This focus has made the convergence of SaaS and business services, including business process outsourcing (BPO), a predictable and natural step in the evolution of both industries.

The logical fit of these two worlds has already been tested and proven in the case of ADP and Employease who have been working together since October 2004. Employease is a provider of web-based solutions and outsourcing services for HR and benefits professionals. Over the past twenty-two months, ADP Major Accounts Services has sold, deployed and supported Employease’s solutions to mid-sized businesses seeking an integrated suite of web-based, hosted payroll, human resources and benefit administration solutions under the brand name, ADP HR/Benefits Solutions.

Based on the success of their alliance, an otherwise risky acquisition should have a good chance of succeeding. In part, this is because business services and SaaS share a common service-orientation. In this particular case, both companies also share common customers and goals of delivering a full suite of integrated solutions.

Unfortunately, the same hasn’t always been true when a variety of technology companies have acquired SaaS vendors, and couldn’t meld their differing cultures and operating models together.

THINKstrategies expects this announcement to spark a series of additional acquisitions of SaaS companies by business service providers.